The Fed could raise rates to 5% and leave them there, and the central bank will only cut in the face of severe economic weakness, Bridgewater strategist says
- The Fed could surprise markets by keeping the Federal Funds Rate elevated for an extended time, Bridgewater's chief investment strategist said.
- The Fed may initiate multiple rounds of tightening to tame inflation, which poses risks to markets.
Many investors are forecasting the Federal Reserve to begin easing its interest rate hike campaign soon, but Rebecca Patterson, Bridgewater's chief investment strategist, says there's a chance the Fed surprises markets and keeps rates elevated for an extended stretch of time.
"What's not priced in is the Fed going high, and holding," Patterson told Bloomberg on Monday. "The market's anticipating right now that we get significant rate cuts starting in the second half of next year, and we think without severe economic weakness to justify that, we're going to get the Fed pausing, but not cutting."
Odds are, the Fed will still believe it has work to do to tame inflation, she said, and that could result in postponing any rate cuts.
"I think we're going to see the Fed going at least to 5% on the Fed Funds, with a probability that's not de minimis that they may have to go higher," Patterson said, adding that if the central bank isn't satisfied with inflation by that point, it could initiate another round of tightening.
Sustained elevated rates will catalyze dramatic changes to the investing landscape, in Patterson's view. Bridgewater is currently cautious on assets, she said, even as traders seem to be pricing in a dovish pivot from the Fed.
"While there is going to be this tug of war how much will the Fed accept inflation versus force inflation to its target, how much growth pain will we get, we continue to believe that there's another shoe that has to drop, and that is the economy," Patterson said.
The easy-money era is ending, Patterson maintained, and the years ahead likely won't exhibit the same low inflation and low macro volatility as the recent past.
"We're really seeing the market move into a new paradigm," she said. "We haven't had short-term rates this high in a very long time, and so it is interesting to think about how our inventors are going to position for the next decade versus the last decade...we think we're going to get a lot of more structural, bigger market changes."
- Ashok Gehlot: Magician leaves centre stage in Rajasthan
- Trauma made Abrar an 'Animal': Bobby Deol on his negative role
- Victory of Modi's guarantees, say BJP leaders as party sweeps states states
- Sunil Kanugolu: The poll strategist behind Congress' win in Telangana
- Digvijaya and Kamal Nath are now history, says Ashwini Vaishnaw as BJP attains victory in MP